How to Create a River of Passive Income

How to Create a River of Passive Income
Photo by lucas Favre / Unsplash

In the world of finance, there are two types of income: active and passive. Active income is the money that you earn based on your efforts and hard work. If you work more hours or take on more projects, you will earn more money. On the other hand, passive income is money that you earn without actively working for it. This may come from investments, rental properties, or other sources that generate income without requiring ongoing work.

If you want to focus on building your passive income and creating a more sustainable financial future, you need to stop involving yourself actively in every work. This means you need to identify the "Next Big Thing" that will help you generate more passive income and reduce your active involvement in business processes. To achieve this, you should develop a high-performance team and create a business model that will help you generate more passive income.

Ritesh Agarwal, the Founder of OYO, offers an excellent example of this. He said, "I want to hire a manpower that can replace me so that I can think of the Next Big Thing." By developing a team that can handle the day-to-day operations of your business, you can free up your time to focus on new opportunities and income streams.

Let's take a closer look at how you can use passive income to build wealth. If your monthly income is $5,000, and your monthly expenses are also $5,000, you are essentially living paycheck to paycheck. You may have spent your money on expensive luxury items that don't hold their value over time, like luxury cars, expensive watches, or high-end mobile phones.

However, if you increase your monthly income to $10,000 and keep your expenses at $5,000, you can start building wealth. By reinvesting the remaining $5,000 in passive income streams, you can generate even more money over time. This could include investing in stocks, rental properties, or other investments that generate ongoing income.

In summary, building passive income is a critical step towards achieving financial freedom. By developing a high-performance team and creating a business model that generates passive income, you can reduce your active involvement in business processes and focus on building new opportunities. With careful planning and investment, you can build a sustainable financial future that provides ongoing income and long-term security.

Four Quadrants

Based on their profession, individuals can be categorized into four distinct quadrants. The first quadrant comprises employees who earn a salary exclusively based on the number of days they work in an office. In other words, they can only earn as much as they work. The second quadrant is for self-employed individuals who work for themselves, such as doctors, lawyers, and trainers. Their earnings are directly proportional to the amount of work they do. Moving on to the third quadrant, we have investors, such as Warren Buffet, who generate portfolio income by investing in businesses. For instance, if you invest in JB HI-FI, your invested capital will grow automatically as JB HI-FI income increases. Finally, the fourth quadrant is for business owners who develop business models and practices that generate recurring revenue.

It is essential to note that while 95% of the population falls under the employees and self-employed quadrants, they only earn 5% of the total income. On the other hand, only 5% of the population falls under the business owners and investors quadrants, but they generate 95% of the income. This statistic highlights the significant disparity between the income generated by different quadrants, which can have lasting effects on an individual's financial stability and future prospects.

Other Methods

There are various methods to earn passive income aside from being a business owner or investor. One such method is the Average Revenue per User, which is commonly used by companies like Telecom, Amazon Prime, and Netflix. This approach is also referred to as the Subscription-based Model, where customers pay a regular fee to access a service.

Another way to earn passive income is through franchising. You can create a business model and offer franchise opportunities to others, allowing them to work while you earn a share of the profits.

Rental income is another option. If you have invested in property, you can earn passive income by renting it out to tenants. This can be a reliable source of income if managed correctly.

Building a High-Performance Team is also an excellent way to earn passive income, provided you keep two things in mind. Firstly, if your physical presence is required for the business to operate, you are earning active income. However, if your presence is not necessary, then you are earning passive income. Secondly, you must create or adopt a business model that allows your team members to work without your involvement. This will enable you to focus on other business opportunities and expand your enterprise.

Contract Base Agreement and Silent Business Partners are other methods to earn passive income. These methods involve partnering with other individuals or entities, allowing you to earn a share of the profits without actively participating in the business's day-to-day operations.

The framework to Generate Passive Income

As a business owner, generating passive income is a crucial step towards achieving financial success. However, it can be challenging to determine whether your existing business has the potential to produce sustainable and consistent cash flows. To help you assess your business's passive income potential, we have put together a framework of six questions that you can use to evaluate your business's ability to generate passive income.

The first question that you need to answer is whether the income will come soon in your business. If you are unsure when the income will come, then you should rate your response as 1-3. On the other hand, if you believe that you will receive income soon, then you should rate your response as 4-5.

The second question you need to consider is whether the income in your business will be regular. If your business is seasonal or project-based and your income is not regular, then you should rate your response as 1-3. However, if your income is predictable and regular, then you should rate your response as 4-5.

The third question you should answer is whether your business has a sustainable cash flow. If your business does not have long-term income possibilities, then you should rate your response as 1-3. If you have built a business model that has long-term income possibilities, then you should rate your response as 4-5.

The fourth question you should ask yourself is whether your business model gives increasing cash flow. If your business model will give you cash flows in the future but not increasing cash flows, then you should rate your response as 1-3. However, if your business model gives you high and increasing cash flows year after year, then you should rate your response as 4-5.

The fifth question you need to consider is how much personal time is required in your business. If you have to give 90 hours per week to your business, then you should rate your response as 1-3. If you have to give 10-15 hours or 5-6 hours per week to your business, then you should rate your response as 4-5.

Finally, you need to consider whether physical on-site engagement is required in your business. If you have to do the work yourself and also need to monitor your team, then you should rate your response as 1-3. If you do not need to work in your business, then you should rate your response as 4-5.

Once you have rated your responses to these six questions, add up the scores. If your total is below 10, then your business will never make you rich. However, if your score is more than 20, you will become rich soon.

One golden statement to keep in mind is the idea of owning a business but not managing it. This means that the business is yours, but other people are managing it. If you understand this method, then your cash flows will make you rich sooner. Your business will give you extra cash flows that you can invest in generating additional income. You can use this extra income to improve your lifestyle and build the life you truly desire.